CapitaMalls Asia

OCBC on 10 Sept 2013

Latest Chinese economic data-points has mostly been above view, painting a picture of modestly recovering fundamentals. Over the last month, the Chinese PMI, trade and inflation figures have mostly beat expectations which increasingly establishes a base case for at least a 7.5% economic growth rate this year – the target set by Chinese authorities. We look forward to Chinese industrial production and retail sales reports today, which are expected to further add to signs of recovery. We believe these are key positives for CMA and reinforces the long-term outlook of its Chinese mall portfolio, which has continued to put up firm numbers year to date. 1H13 tenants sales at CMA’s Chinese malls grew at 9.5% YoY on a psf basis; excluding tier 1 cities, tenant sales grew by 11.0% YoY. Long term tailwinds from the secular growth in Chinese retail consumption remain intact, in our view. Maintain BUY with an unchanged fair value estimate of S$2.55.

Signs of economic stabilization in China
After significant uncertainty over the last twelve months about the extent of China’s economic slowdown, we note that latest data-points have been mostly above view, painting a picture of modestly recovering fundamentals. In early Sep, we saw the HSBC PMI increased to 50.1 for Aug 2013 – above expectations and up from an 11-month low of 47.7 in Jul 2013 – which suggests that the Chinese manufacturing sector has turned the corner on new orders and output. This was corroborated by the official PMI a week later which also rose to 51.0 for Aug 2013 and beating market expectations. In addition, Chinese authorities yesterday reported that exports increased more than expected in Aug 2013, rising 7.2% YoY and beating a 5.5% consensus. Inflation data was also positive with consumer prices coming up 2.6% which left room for extra stimulus from authorities should we see a sudden downside acceleration. We believe these datapoints increasingly point to a base case of at least a 7.5% economic growth rate this year, which is the target set by authorities. We look forward to Chinese industrial production and retail sales reports today, which are expected to further add to the picture of recovery.

Long term fundamentals of Chinese mall portfolio intact
We believe increasing signs of stabilizing economic fundamentals in China reinforces the outlook of CMA’s Chinese mall portfolio, which has continued to put up firm numbers year to date. 1H13 tenants sales at CMA’s Chinese malls grew at 9.5% YoY on a psf basis; excluding tier 1 cities, tenant sales grew by 11.0% YoY. Same-mall NPI growth is up 12.1% YoY in 1H13 and Chinese portfolio-wide occupancy rates is at a healthy 96.9%.

Maintain BUY
We rate the stock with a BUY rating and an unchanged fair value estimate of S$2.55. Long term tailwinds from the secular growth in Chinese retail consumption remain intact, in our view.

Singapore Telcos

UOBKayhian on 10 Sept 2013

Singapore Telecommunications- Growth from monetising data.

Monetising data with tiered data plans. Singapore telcos have restructured the pricing of data usage to enhance their ability to monetize data usage. We performed simulations to ascertain the impact of migration
to tiered data plans and planned increase in excess charges for data. Our study indicates that post-paid ARPU for Singapore telcos would increase by an average of 1.5% in 2013, 4.5% in 2014 and 6.9% in 2015.

M1 and StarHub are key beneficiaries as mobile accounted for 78.3% and 56% of service revenue respectively in 2Q13. We have increased our earnings forecasts for M1 by 4% for 2014 and by 12.8% for 2015. Similarly, we have raised our earnings forecasts for StarHub by 0.8% for 2014 and by 5.1% for 2015.

Maintain OVERWEIGHT. Migration to tiered data plans and growth in usage of data will strengthen growth prospects for the telecommunications sector. Re-iterate our BUY recommendations for M1 and StarHub. We have increased our target prices for M1 by 10.3% to S$3.95 and for StarHub by 2.6% to S$4.72. Maintain HOLD for SingTel but would accumulate the stock at S$3.18. We believe there is upside to our target prices for Singapore telcos as we conservatively assumed a terminal growth rate of 1.0%.

Singapore Banks

Phillip Securities Research, Sept 9

NET interest margins (NIMs) stabilised for second consecutive quarter. We see potential for gradual recovery in the medium term.

Downward pressures on lending rates were mitigated by lower customer deposit costs, and higher efficiencies through higher loan-to-deposit (LDR) ratios. Overseas loans growth will boost NIMs.

YTD loans growth was strong, broad-based, at 10.3 per cent to 11.5 per cent.

FY2013 guidance is increased to mid-double digit and mid-teens for DBS and UOB respectively. OCBC stood pat with single-digit growth guidance, citing a cautious outlook.

We expect Q3 2013 loans balance to be affected by depreciating Asean currencies (rupiah, baht and ringgit).

LDRs may further increase past current high levels for better efficiencies, and liquidity levels remain healthy.

H1 2013 fees and commission were boosted by favourable market conditions and strong wealth management contributions. Growth of fees and commission may slow in Q3 2013 from a high base, due to economic concerns in the quarter.

Non-interest income continues to be volatile. Higher recurring contributions from customer flow a positive. Q3 2013 contributions from overseas subsidiaries likely impacted by currency depreciation, macro headwinds.

There were significant unrealised available-for-sale reserve losses in Q2 2013, and continued losses are expected. Non-performing loans remain low, with no credit- quality concern.

We are positive on the stabilising of NIMs, with the potential for recovery in the medium term. Loans growth has also been stronger than expected, though likely negatively impacted by the recent depreciation of a few Asean currencies. Fees and commissions continue to grow, driven by wealth management fees.

While market-related activities have likely slowed due to macro-economic concerns in the quarter thus far, global indicators point to a recovery in the global economic environment.

Based on an increasingly positive global macro outlook, and strong fundamentals, we maintain "overweight" on the banking sector. We maintain our "accumulate" ratings on DBS and UOB, and "neutral" rating on OCBC based on our P/B derived valuations.

Sector - OVERWEIGHT

Singapore Reits

OCBC on 9 Sept 2013

We now see fairly solid grounds for a base case that the Fed would taper QE3 in Sep 2013 or soon after, and we downgrade the S-REIT sector to NEUTRAL on three key reasons. First, we believe this is the beginning of a long term secular, not cyclical, trend of rising interest rates. Higher discount rates and liquidity factors, due to capital re-allocation across asset classes, would likely negatively impact REIT prices over the mid to long term. Second, we believe a limited fundamental growth outlook for the sector is unlikely to trump the negative impact of rising rates on S-REIT prices. Finally, a key proxy for cheapness – the sector’s yield spread against the SG 10Y bond – implies that the sector appears fairly priced now. Our most preferred sub-sectors are domestic retail and office where rental outlooks and valuations still appear fairly appealing. Our top picks are CapitaCommercial Trust [BUY, FV: S$1.61], Starhill Global REIT [BUY, FV: S$0.95] and Suntec REIT [BUY, FV: S$1.80].

Base case is for Sep taper
On 22 May 2013, Fed Chairman Bernanke first raised the specter of a reduction in monthly purchases under the QE3 program. As the dust begins to settle after significant volatility in global markets, and with subsequent US data pointing to a moderate recovery, we now see fairly solid grounds for a base case that the Fed would taper QE3 in Sep 2013 or soon after.

A secular, not cyclical, trend of rising interest rates
We now opt to downgrade the S-REIT sector to NEUTRAL on three key reasons. First, we believe this is the beginning of a long term secular, not cyclical, trend of rising interest rates. We expect higher discount rates and liquidity factors, due to capital re-allocation across asset classes, to negatively impact REIT prices over the mid to long term. To be clear, while history shows that S-REITs can outperform in periods of rising interest rates, we believe this is unlikely to happen ahead, which brings us to the second basis for our downgrade.

Limited growth won’t trump negative impact of higher rates
Second, while DPUs are expected to grow 4.3% in FY14, this is to a large extent due to positive reversions off expiring leases signed near the last financial crisis troughs; rental outlooks across sub-sectors are generally only neutral to mildly positive. In addition, we see limited scope for much capital appreciation ahead given current cap rate levels. Also, as interest rates rise, we believe REIT managers will also find it increasingly challenging to grow DPU through accretive M&A. 

S-REIT sector looks fairly valued now
Finally, a key proxy for cheapness – the sector’s yield spread against the SG 10Y bond – implies that the sector appears fairly priced now. At 379 bps currently, the spread is within one standard deviation of the three-year average and to maintain this spread, we think that REIT prices would have to come down in an environment of decelerating liquidity, particularly as we begin to normalize out of ultra-low interest rates.

Prefer domestic retail and office plays
Over the last three months, we have adjusted the discount rates in our valuation models by 140 bps to 170 bps to reflect higher risk free rates, and regional and sector betas, and have consequently reduced our fair value estimates by 3% to 20%. Our most preferred sub-sectors are domestic retail and office where rental outlooks and valuations still appear appealing. Our top picks are CapitaCommercial Trust [BUY, FV: S$1.61], Starhill Global REIT [BUY, FV: S$0.95] and Suntec REIT

Wilmar

OCBC on 6 Sept 2013

Wilmar International Limited’s (WIL) share price has taken a bit of a hit after it reported slightly below par 1H13 results on 7 Aug (core earnings met about 40% of our previous full-year forecast), falling 4.5% to a recent low of S$3.0x. But as mentioned in our 12 Aug report, we would be buyers at S$3.10 or better, as we believe that most of the risks would have been captured in the price. Keeping our fair value at S$3.33 (still based on 12.5x blended FY13/FY14F EPS), we note that there is now a decent 10% upside from here. Hence we are upgrading our call from Hold to BUY. Note that an appreciating USD against SGD would also have a modest boost to our fair value.

Fallen to a decent entry level
Wilmar International Limited’s (WIL) share price has taken a bit of a hit after it reported slightly below par 1H13 results on 7 Aug (core earnings met about 40% of our previous full-year forecast), falling 4.5% to a recent low of S$3.02. But as mentioned in our 12 Aug report, we would be buyers at S$3.10 or better, as we believe that most of the risks would have been captured in the price.

Upgrading to BUY
Keeping our fair value at S$3.33 (still based on 12.5x blended FY13/FY14F EPS), we note that there is now a decent 10% upside from here. Hence we are upgrading our call from Hold to BUY. Note that an appreciating USD against SGD would also have a modest boost to our fair value. 

Should also expect a better 2H performance
In addition, WIL tends to perform better in the second half. One reason is the seasonality of its sugar business in Australia. That outfit will typically reverse from a loss-making position to a highly profitable one. And with the sugar prices (see Exhibit 2) already on the rebound, we believe that 2H13 would be no exception (although there may still be lingering concerns over a mystery cane disease – Yellow Canopy Syndrome – that causes canes to turn yellow).

Limited impact from slowing China growth
Meanwhile, China – WIL’s largest market – appears to be opting for slower growth this year to allow the government to solve fundamental problems hindering long-run development, according to President Xi Jinping . However, we note that market still expects China to expand by 7.5% this year, which should not pose any issues for WIL’s consumer pack business. Management had previously said that retail packs are fairly resilient and may even benefit from more people choosing to cook at home rather than dining out.

Cordlife Group

Voyage Research, Sep 5

YESTERDAY, Cordlife Group (Cordlife) announced the proposed acquisition of a 19.9 per cent stake in StemLife Berhad (StemLife) at about RM29.6 million, which will be fulfilled via the issuance of 8 million Cordlife shares and RM2.85 million cash. The consideration is arrived at after taking into account StemLife's cash balances of RM76.8 million as at end-June 2013, freehold land with an original book value of RM6.9 million and its fundamental prospects.

We see several benefits in this acquisition. First, it will enable Cordlife to expand its footprint into Malaysia and, potentially, Thailand. There may be an opportunity for a Cordlife-StemLife collaboration; they can cross-sell cord blood banking services in both nations and offer a different tier of services.

More growth will also be generated following Cordlife's intention to extend its product offerings in the mother-child segment. StemLife will be able to improve its gross margin as it can now ride on Cordlife for bulk purchasing and adopt more effective and advanced systems.

Most of the growth prospects will be gradually realised over the years. Hence, we are upping our terminal growth rate to 5.5 per cent from 5 per cent and assuming that StemLife will contribute S$0.5 million attributable profit in FY2014 and S$0.9 million profit in FY2015. Our model reflects a revised price of S$1.60 per share. Maintain "invest".

INVEST

Goodpack

DBS Group Research, Sep 5

GOODPACK has demonstrated much resilience in both earnings and share price performance.

During the global financial crisis, Goodpack's revenue for 2009 eased off by just 2.9 per cent y-o-y, despite the 9 per cent drop in overall rubber tyre consumption volumes. This is attributable to its synthetic rubber (SR) market share gain and long term relationship with blue-chip customers. During the 2010 recovery, Goodpack showcased its ability to fully capitalise on the upswing, as revenues grew by 28.4 per cent - nearly twice the growth in volumes for rubber consumption in the tyre sector. The short- and long-term beta of Goodpack's share price is at 0.6-0.7 times, suggesting it is less volatile than the market, partly because Goodpack's shares are tightly held.

Goodpack's earnings growth has been rather muted in the past two years, growing at mid-to-high single digits due to challenging operating environment. We believe the tide is changing for Goodpack and project a two-year compound annual growth rate of 17 per cent in FY2013-2015F, driven by market share gain in SR segment and cost-saving initiatives. This is augmented by the recovery in US/Europe (45 per cent of Goodpack's revenue) and bottoming out of the rubber industry, which is expected to grow at 2-6 per cent in the same period. The crytalisation of an autopart contract from a major OEM in Europe will prompt us to further re-rate. Besides, Goodpack should not be affected by any potential rate hikes as about 90 per cent of its debts are fixed rate.

Goodpack is trading at -1 standard deviation, and near the replacement cost of its IBC fleet, which is not a fair reflection of Goodpack's market leadership, global logistic network, strong customer base and growth prospects. Our discounted cash flow-based S$2.00 target price translates to 15.4 times forecasted FY2014 price to earnings and 2.3 times P/BV, in line with historical mean. Goodpack also offers 3-4 per cent dividend yields based on a 45 per cent dividend payout ratio. Reiterate "buy" on Goodpack with a potential total return of 24 per cent.

BUY

Singapore Telcos

UOBKayhian on 5 sept 2013

M1 (M1 SP/BUY/S$3.20/Target: S$3.95)
StarHub (STH SP/BUY/S$4.14/Target: S$4.80)
SingTel (ST SP/HOLD/S$3.44/Target: S$3.52)

Singapore telcos have restructured the pricing of data usage to enhance their ability to monetise date usage:
a) Migration to tiered data plans. SingTel pioneered tiered data plans for 4G services when it introduced Flexi Lite, Flexi Value and Flexi Plus plans with data bundles of 2G, 3G and 4G respectively in Jun 12. M1 and StarHub subsequently launched similar tiered data plans in Sep 12. The previous overly generous data bundle of 12GB has been removed.

b) Increasing excess charges for data. SingTel will increase excess charges for data from S$5.35/GB to S$10.70/GB for customers recontracting from 16 September onwards. We expect StarHub to follow
suit in re-pricing excess charges higher from S$6.42/GB to S$8.56/GB starting Jan 14. M1 has not disclosed any pricing details but is likely to abide by industry trend in monetising data usage. Telcos are starting to benefit from migration to tiered data plans and increased usage of data. M1, StarHub and SingTel reported sequential increases in ARPU of 2%, 5.9% and 1.3% respectively for 2Q13. Re-iterate BUY for M1 and StarHub. We have increased M1’s target price by 10.3% and StarHub’s by 4.3%.

Sembcorp Industries

OCBC on 5 Sept 2013

Sembcorp Industries (SCI) announced last week that it will expand its water business in China’s Liaoning Province with two new wastewater treatment projects in industrial parks in Panjin City. We see the initial phases of these projects as incremental expansions in China, adding about 10% to the group’s total industrial water capacity in the country. The group’s utilities business in China has seen good growth over the years, with net profit increasing from S$6m in 2009 to a forecasted S$50m this year. With the expertise to provide utilities like energy, water and wastewater treatment which will be in demand due to China’s growth, we are optimistic on the long-term prospects of China as a key market for the group. Moreover, SCI has expertise on sustainable living with a focus on environmental protection, which should be in demand in China due to the country’s environmental problems. Maintain BUY with S$6.48 fair value estimate.

Announces two wastewater projects in China’s Liaoning Province
Sembcorp Industries (SCI) announced last week that it will expand its water business with two new wastewater treatment projects in industrial parks in Panjin City. We see the initial phases of these projects as incremental expansions in China, adding about 10% to the group’s total industrial water capacity in the country where SCI has about 298,000m3/day of industrial water capacity, and 1,030,000m3/day of municipal water capacity. 

1st phase of first project to add 10,000m3/day capacity
The first would involve a JV agreement to build, own and operate a new RMB117.3m (~S$24.3m) industrial wastewater treatment plant to serve industrial customers in Panjin Fine Chemical Industrial Park (PFCIP). SCI will hold 95% share in the JV.

2nd project’s initial capacity about 22,000m3/day
For the second project, SCI plans to develop an industrial wastewater treatment plant in the West of Panjin Liaodong Bay New District. The plant will be capable of treating highly concentrated industrial wastewater, and is expected to cost around RMB185m (~S$38.4m). Management believes that the industrial park in which this plant is located has strong growth potential. 

Growing utilities business in China
The group’s utilities business in China has seen good growth over the years, with net profit increasing from S$6m in 2009 to S$30m in 2012. We are expecting net profit of about S$50m this year; 1H13 net profit has already reached S$32.7m. 

Long track record in the country; bright long-term prospects 
SCI has a long track record in China, having invested there for about 20 years 
and with a presence spanning 15 provinces. With the expertise to provide utilities which will be in demand due to China’s growth, we are optimistic on the long-term prospects of China as a key market. Moreover, SCI has expertise on sustainable living with a focus on environmental protection, which should be in demand in China due to the country’s environmental problems. Meanwhile, both plants are targeted for completion in 1Q15, and have no impact on our FY13-14 earnings forecasts. Maintain BUY with S$6.48 fair value estimate.

Hutchison Port Holdings Trust

OCBC on 4 Sept 2013

Hutchison Port Holdings Trust (HPH Trust) is the biggest container port operator in China’s Pearl River Delta region by throughput, with market shares of around 70% at Hong Kong’s main Kwai Tsing Port and 47% in Shenzhen. We believe that its market dominance in the Pearl River Delta puts the trust in a strong position to capture the region’s trade flows of manufacturing exports and raw material imports, including intra-Asia cargo. At the current price of US$0.725, we believe that the trust offers upside potential, including distributions, of more than 10% over the next 12 months as the recovery in the US and Europe gathers momentum. The main risk to our investment thesis in the short term is a renewed slowdown in these major economies. Still, we expect strong support for HPH Trust at its current price, given its attractive distribution yield of around 7%. Initiate with a BUY rating and target price of US$0.76.

Market leader in the Pearl River Delta
Hutchison Port Holdings Trust (HPH Trust) is the biggest container port operator in China’s Pearl River Delta region by throughput, with market shares of around 70% at Hong Kong’s main Kwai Tsing Port and 47% in Shenzhen. The business trust enjoys the backing of sponsor Hutchison Port Holdings, one of the world’s biggest port operators and a subsidiary of HK-listed conglomerate Hutchison Whampoa, headed by billionaire Li Ka-shing.

Well-placed to ride rebound in world trade
HPH Trust owns interests in four deep-water container port assets – three at Hong Kong’s main Kwai Tsing Port and one in Shenzhen – with a combined throughput of some 22.9m TEU in 2012. We believe that its market dominance in the Pearl River Delta puts the trust in a strong position to capture the region’s trade flows of manufacturing exports and raw material imports, including intra-Asia cargo. HPH Trust is also likely to be a key beneficiary of the trend by shipping companies to deploy bigger vessels as they strive for greater economies of scale; its container terminals are situated in harbours with natural deep water approaches and are equipped with advanced equipment capable of serving even the world’s biggest vessels. Overall, we believe that HPH Trust is well-placed to benefit from a rebound in international trade as the US and Europe economies recover, as well as continued growth in intra-Asia trade.

Recent price drop offers good entry point, decent upside
HPH Trust’s unit price has declined by 16% from its recent peak of US$0.86 on 2 Apr, hurt by concerns over the impact of strikes by port workers in Hong Kong in April and in Shenzhen earlier this week (both since resolved), and the weakness in the global economy. At the current price of US$0.725, we believe that the trust offers upside potential, including distributions, of more than 10% over the next 12 months as the recovery in the US and Europe gathers momentum. The main risk to our investment thesis in the short term is a renewed slowdown in these major economies. Still, we expect strong support for HPH Trust at its current price, given its attractive distribution yield of around 7%. Initiate with a BUY rating and US$0.76 target price.

Singapore Press Holdings

OCBC on 4 Sept 2013

We see SPH’s REIT spin-off as a positive move and believe management’s decision to hold a 70% majority stake makes significant sense. However, the latest 3QFY13 figures presented a picture of continued headwinds for the group’s core print business given the cumulative impact from cooling measures on property and automobile ads. 3QFY13 ad revenues fell 4.5% YoY in 3QFY13 and circulation revenues also dipped 3.2% YoY. With current headwinds for the print business and limited visibility in terms of catalysts ahead, we believe the risk-reward proposition for the counter has turned fairly neutral. Downgrade to HOLD with a lowered fair value estimate of S$4.14, versus S$4.94 (before the REIT spin-off) previously. Our barometer for an upturn in outlook ahead consists of two key groups of operating metrics: for its print businesses - ad and circulation revenue growth; and for its retail property segment – expedient and accretive capital deployment.

A REIT success but 18 S-cents bonus below view
As anticipated, SPH conducted a successful REIT spin-off for Paragon and Clementi Mall, yielding substantial cash proceeds and subsequently an 18 S-cents bonus dividend for shareholders. We see the establishment of a REIT subsidiary vehicle as a major positive for the group’s mall development business and believe management’s decision to hold a 70% majority stake makes significant sense – this enables accounting consolidation and for the bulk of property earnings to continue accreting to SPH. That said, the 18 S-cents bonus cash dividend was somewhat below view, particularly as the group was already sitting on an fairly hefty war-chest of ~S$0.9b investible funds as at end 3QFY13. We believe that, for investors, a key performance indicator for the group ahead is likely to be the degree in which management can expediently deploy excess capital for attractive returns.

Still seeing headwinds for the print business
In addition, the latest 3QFY13 figures presented a picture of continued headwinds for the group’s core print business. Over 3QFY13, operating revenue from the key Newspaper and Magazine segment fell 3.3% to S$259.3m. Given the cumulative impact from cooling measures and hawkish loan requirements on the property and automobile sectors, conditions for the print business remain challenging. We saw pressure on 3QFY13 ad revenues, which fell 4.5% YoY in 3QFY13, and circulation revenues also decreased S$4.9m YoY (down 3.2%) as the physical subscription base declined. 

Downgrade to HOLD
Given current headwinds for the print business and limited visibility in terms of catalysts ahead, we believe the risk-reward proposition for the counter has turned fairly neutral. Downgrade to HOLD with a lowered fair value estimate of S$4.14, versus S$4.94 (before the REIT spin-off) previously. Our barometer for an upturn in outlook ahead consists of two key groups of operating metrics: for its print businesses - ad and circulation revenue growth; and for its retail property segment – expedient and accretive capital deployment.

OCBC Bank

CIMB Research, Sept 2

OCBC's 2012 ROE beat peers because GEH's accounting earnings were buoyed by the rising bond market. The reverse is now true. We expect OCBC's ROE to lag peers now, making it difficult to justify current valuations ...

As OCBC currently has the highest exposure to problematic Indonesia and India, it is likely that its non-performing loans will deteriorate to the same level as its peers'. Coming from especially low levels, increasing credit costs will pose a potential headwind to earnings.

Our Gordon growth model-based target price of S$10.09 (based on 1.27 times 2013 P/B) remains unchanged. Maintain "underperform", with the de-rating catalysts of rising interest rates, poor investment appetite from private banking clients, and eventually, rising credit costs. OCBC remains our least preferred Singaporean bank.

UNDERPERFORM

Asian Consumers

DMG & Partners Research, Sept 3

CONSUMER stocks under our coverage were dealt a double-blow by spiking earnings misses and rising interest rates, which eroded their average YTD gain to -1 per cent. With valuations near their historical highs and limited relief from weak consumer sentiment amid escalating cost pressures, we see an unexciting risk-reward trade-off as investors are likely to start factoring in higher yield expectations going forward.

Up to May 2013, the 100 regional consumer counters we cover posted an average return of 19 per cent. Since then, however, they have lost their share price gains, falling by an average one per cent YTD as more companies missed earnings estimates and interest rates rose. The twin-blow reduced their lead over the relevant MSCI consumer staple and discretionary indices, which posted an average loss of 4 per cent YTD.

The Q2 2013 earnings saw the highest level of earnings disappointments in percentage terms since we started tracking the statistics a year ago. Out of the 62 companies that reported their results, 11 per cent were above, 40 per cent within and 49 per cent below our analysts' estimates (Q1 2013: 6 per cent, 68 per cent and 26 per cent, respectively). Cost-induced pressure was commonly cited by regional companies as the key reason for falling short of expectations. Of more concern is our observation that consumer confidence in the region has been waning in recent months.

Our earlier sensitivity analysis shows that a 0.5 percentage point increase in 10-year government bond yields may potentially give rise to an average 10 per cent drop in the fair values of stocks, based on discounted cash flow. Following a 0.7 percentage point spike in US 10-year Treasury bond yield since May to 2.8 per cent currently, the corresponding yields from countries in the region have risen by an average of 1.1 percentage point, with Indonesia seeing the sharpest 2.4 percentage point spike to 8.4 per cent.

Despite the recent correction, valuations remain high at about 16 times forward PE, +0.8 standard deviation to the sector's historical 10-year mean of 14 times. In view of limited relief from weak consumer sentiments and escalating cost pressures, we believe the sector's near-term risk-reward trade-off would be unexciting.

(Singapore stocks under coverage: Eu Yan Sang, "buy", target S$0.92; OSIM International, "buy", target S$2.38; Sheng Siong Group, "buy", target S$0.78.)

Olam

OCBC on 2 Sept 2013

Olam International Limited (Olam) posted FY13 revenue of S$20.9b, up 22%, and was around 5% ahead of our forecast; versus reported net profit, core earnings came in much lower at S$314.3m, but still up 13%, and was about 3% ahead of our estimate. Olam declared a final dividend of S$0.04/share, unchanged from last year. In view of the eroding profitability, we pare our FY14F core net profit figure by 16% (but still expect to see decent earnings growth in FY15). This also drops our fair value from S$1.73 to S$1.45, still based on 10x FY14F EPS. Maintain HOLD.

FY13 results just in line 
Olam International Limited (Olam) posted FY14 revenue of S$20.8b, up 22%, and was around 5% ahead of our forecast, as it continued to enjoy strong volume growth (+49.5%). However, reported net profit slipped 2% to S$362.6m, hit by higher taxation. Besides higher taxation (in line with our forecast), we also note that margins have fallen across some business segments, core earnings came in much lower at S$314.3m, but still up 13%, and was about 3% ahead of our estimate. Olam declared a final dividend of S$0.04/share, unchanged from last year.

Profitability/ton appears to be lower
Business-wise, the Food Staples and Packaged Foods segment contributed 36% of total 4QFY13 revenue, as revenue jumped 53% YoY, volume +29%; but we note that profitability has slipped, with GC/ton down 17% and NC/ton down 12%. Confectionery & Beverage Ingredients was next with 24% contribution in 4Q, where revenue climbed 22% YoY, volume +23%; but again we note lower profitability, with GC/ton falling 41% and NC/ton down 42%. Industrial Raw Materials contributed 22% of 4Q13 revenue, but sales slipped 4% YoY, even as volume +30%; GC/ton was flat, but NC/ton rose 19%. 

Net gearing back at 2.0x 
Meanwhile, net gearing has eased somewhat from 2.2x as of end Mar to around 2.0x as of end Jun, and is back to the same level as last Jun. Olam believes that it has made progress on its strategic plan priorities and pathways identified include taking a rebalanced approach to growth and cash-flow generation (aims to be FCF positive by FY14). 

Lower S$1.45 fair value
In view of the eroding profitability, we pare our FY14F core net profit figure by 16% (but still expect to see decent earnings growth in FY15). This also drops our fair value from S$1.73 to S$1.45, still based on 10x FY14F EPS. Maintain HOLD.

Olam

OCBC on 3 Sept 2013

Muddy Waters (MW) has just issued a new report on Olam International Limited (Olam), titling its “Not Changing the Old Ways”, which again raised issues over transparency and corporate governance, as well as remaining skeptical if Olam will operate differently in the future. In particular, the viability of the Gabon fertilizer project was called into question, where MW believed that Tata Chemical (TCL) is highly unlikely to participate in the project. In any case, our current forecasts do not include any contributions from Gabon as we have always held the conservative view and would only include the project if it has achieved financial close. While we expect the new MW report to weigh slightly on sentiment, we are maintaining our forecasts for now, given that we have already pared our FY14F core net profit figure by 16% recently. Maintain HOLD with an unchanged S$1.45 fair value (based on 10x FY14F EPS) for now.

New Muddy Water Report
Muddy Waters (MW) has just issued a new report on Olam International Limited (Olam), titling its “Not Changing the Old Ways” following the release of its FY13 results. The report again raised issues over transparency and corporate governance, as well as remaining skeptical if Olam will operate differently in the future; this given that there have been no changes to Olam’s board since MW’s initial report. 

Gabon project comes under fire (again)
In particular, the viability of the Gabon fertilizer project was called into question, where MW believed that Tata Chemical (TCL) is highly unlikely to participate in the project. We note that during the results briefing, Olam stated that its relationship with TCL is “still strong” but added that they are “still discussing and have not reached closing conditions”. MW now recommends that Olam “fall on the sword” and terminate the project, despite spending significant money on dredging.

We have not included Gabon in our forecasts)
In any case, our current forecasts do not include any contributions from Gabon as we have always held the conservative view and would only include the project if it has achieved financial close. Recall that the Gabon project was first raised in Apr 2011 where Olam announced that TCL will invest US$290m to acquire a 25.1% stake. 

Maintain HOLD with S$1.45 fair value)
While we expect the new MW report to weigh slightly on sentiment, we are maintaining our forecasts for now, given that we have already pared our FY14F core net profit figure by 16% recently. Maintain HOLD with an unchanged S$1.45 fair value (based on 10x FY14F EPS) for now.

Keppel REIT

UOBKayhian on 3 Sept 2013

Valuations are now more compelling as Keppel REIT (KREIT) offers a yield of 6.6%, a 40bp over the average 6.2% yield for office S-REITs. With physical office transactions at 3-3.5% cap rates, office REITs offer better value for investors to gain exposure to economic growth and improvements in office rentals.

Private placement removes equity overhang. Its recent private  placement (completed on 6 August) of 95m new units at S$1.26 per unit raised gross S$120m (S$118m after fees). The proceeds were used to fund the S$192m acquisition of 8 Exhibition Street in Melbourne, Australia, and remove the near-term equity overhang following the recent acquisition. Australia office properties still resilient. Mirvac and KREIT recently announced that 8 Chifley Square in Sydney is 70% pre-committed ahead of its completion in Oct 13. This is 14ppt up from Apr 13’s (56% precommitted) and reflects positive leasing sentiment for high-quality office space despite a slowing economic growth due to a moderation in commodity prices. The new tenant, Quantium, a data analytics firm, joins other tenants including law firm Corrs Chambers Westgarth and insurance leader QBE Insurance Group at 8 Chifley. Occupancies and precommitments for its other Australia properties (275 George Street, 77 King Street and Old Treasury Building) in KREIT’s portfolio are all above 97%. We upgrade the stock to a BUY (from HOLD) with an unchanged target price of S$1.46, based on dividend discount model required rate of return: 7.1%, terminal growth: 2.2%).

Ezion Holdings

DBS Group Research, Aug 29

EZION has signed a charter contract to provide bareboat charter for a refurbished jack-up rig worth US$49.1 million over four years. Upgrading and refurbishment work is expected to commence at the Middle East yard next week and the rig is scheduled to be delivered to a national oil company in Middle East by mid-2014. The cost of the project - US$40 million - will be funded by equity (30 per cent) and five-year floating bank borrowings (70 per cent).

The contract is secured at Ezion level and the service rig will be chartered from a 50:50 joint venture (JV) of Ezion and Scott & English Limited, a subsidiary of Kim Seng Holdings. Hence, Ezion will consolidate the project revenue but at minimal profits. Bulk of profits will still be recognised under associate/JV income line and/or other income as management fees, similar to their previous JV vessels. We estimate this latest contract to contribute about US$1.5 million in FY2014 and US$3.2 million in FY2015, representing 0.6 per cent and 1.2 per cent of our FY2014 and FY2015 forecasts, respectively.

Currently, Ezion has only one service rig operating in Middle East, in the Arabian Gulf near Qatar. The second one, which will come on stream by early 2014, will be deployed around that region as well.

We are keeping our forecasts intact, with the expectations of three additional contracts this year and eight next year. Maintain "buy" on Ezion with an unchanged target price of S$3.20, pegged to 14 times FY2013/14 PE. We continue to like Ezion's strong growth profile and earnings visibility.

BUY

Real Estate Investment Trusts

Maybank Kim Eng Research, Sept 2

SINGAPORE real estate investment trusts (S-Reits) are currently trading at FY2013 forecast yields of 6.6 per cent, above its historical average of 6.3 per cent. While yields appear attractive, we think it is still early to enter the market at this juncture.

We expect further volatility in the bond market, especially with several macroeconomic uncertainties facing the United States and the global economy as we head into September, namely: (1) possible quantitative easing tapering during the upcoming Federal Open Market Committee meeting on Sept 17-18, (2) budget debate in Washington, (3) Germany election, and (4) imminent US strike on Syria.

Market overhang now lies with impending hikes in interest rates and the possible recalibration of over-inflated property prices - which can drag down NAV. In terms of sector trough valuations, we will advise investors to relook at the S-Reits space at distribution-per-unit yields of 7 per cent and above on average for the sector. This is pegged to a historical yield spread of 380 basis points and longer-term risk-free rate of 3.0-3.5 per cent (currently 2.7 per cent).

This implies further price downside of at least 7 per cent. Maintain "underweight" on the overall sector.

Sector - UNDERWEIGHT

Olam International

OCBC on 2 Sept 2013

Olam International Limited (Olam) posted FY13 revenue of S$20.9b, up 22%, and was around 5% ahead of our forecast; versus reported net profit, core earnings came in much lower at S$314.3m, but still up 13%, and was about 3% ahead of our estimate. Olam declared a final dividend of S$0.04/share, unchanged from last year. In view of the eroding profitability, we pare our FY14F core net profit figure by 16% (but still expect to see decent earnings growth in FY15). This also drops our fair value from S$1.73 to S$1.45, still based on 10x FY14F EPS. Maintain HOLD.

FY13 results just in line 
Olam International Limited (Olam) posted FY14 revenue of S$20.8b, up 22%, and was around 5% ahead of our forecast, as it continued to enjoy strong volume growth (+49.5%). However, reported net profit slipped 2% to S$362.6m, hit by higher taxation. Besides higher taxation (in line with our forecast), we also note that margins have fallen across some business segments, core earnings came in much lower at S$314.3m, but still up 13%, and was about 3% ahead of our estimate. Olam declared a final dividend of S$0.04/share, unchanged from last year.

Profitability/ton appears to be lower
Business-wise, the Food Staples and Packaged Foods segment contributed 36% of total 4QFY13 revenue, as revenue jumped 53% YoY, volume +29%; but we note that profitability has slipped, with GC/ton down 17% and NC/ton down 12%. Confectionery & Beverage Ingredients was next with 24% contribution in 4Q, where revenue climbed 22% YoY, volume +23%; but again we note lower profitability, with GC/ton falling 41% and NC/ton down 42%. Industrial Raw Materials contributed 22% of 4Q13 revenue, but sales slipped 4% YoY, even as volume +30%; GC/ton was flat, but NC/ton rose 19%. 

Net gearing back at 2.0x 
Meanwhile, net gearing has eased somewhat from 2.2x as of end Mar to around 2.0x as of end Jun, and is back to the same level as last Jun. Olam believes that it has made progress on its strategic plan priorities and pathways identified include taking a rebalanced approach to growth and cash-flow generation (aims to be FCF positive by FY14). 

Lower S$1.45 fair value
In view of the eroding profitability, we pare our FY14F core net profit figure by 16% (but still expect to see decent earnings growth in FY15). This also drops our fair value from S$1.73 to S$1.45, still based on 10x FY14F EPS. Maintain HOLD.

Raffles Medical Group

OCBC on 2 Sept 2013

Raffles Medical Group’s (RMG) share price has fallen ~5% since the start of Jul, and we believe this may have been caused by concerns over the impact of the weakening IDR on RMG’s Indonesian patient visits, coupled with the broad market weakness. RMG updated us that it has not felt any significant effects of this on its medical tourism figures. We believe this is because a larger proportion of its foreign patients come to RMG for the treatment of more acute illnesses rather than elective procedures. Meanwhile, RMG would recognise a net gain of ~S$21.4m from the disposal of Raffles Medical Management (which owns the Thong Sia commercial podium) for S$120m, and this would bolster its cash balances. Maintain BUY and S$3.42 fair value estimate on RMG.

Concerns over weakening IDR overdone
Raffles Medical Group’s (RMG) share price has fallen ~5% since the start of Jul, and we believe this may have been caused by concerns over the impact of the weakening IDR on RMG’s Indonesian patient visits, coupled with the broad market weakness. RMG updated us that it has not felt any significant effects of this on its medical tourism figures. We believe this is because a large proportion of its foreign patients come to RMG for the treatment of more acute illnesses. Demand for these cases tends to be more price inelastic in nature. However, there could still be some negative impact on elective surgeries done, in our view, as patients may choose to delay such procedures. A mitigating factor could be RMG’s competitive pricing vis-à-vis its local peers, which may allow it to capture some market share from its competitors for foreign patients who decide to proceed with their treatment but prefer a cheaper alternative in Singapore without compromising on quality.

Sale of property to bolster cash pile
RMG recently entered into a sale and purchase agreement for the disposal of Raffles Medical Management (which owns the Thong Sia commercial podium) for S$120m. This represents a 30.3% and 22.4% premium over its purchase price (acquired in Apr 2011) and latest valuation (as at 31 Dec 2012). Proceeds would be used for RMG’s expansion plans as it is negotiating on a collaboration for a possible integrated international hospital development in Shenzhen, China, which requires ~S$150m of capex (spread over three years). We also do not rule out the possibility of RMG paying a special dividend or increasing its ordinary final dividend payout as a means of rewarding its shareholders.

Reiterate our BUY rating
RMG would recognise a net gain of ~S$21.4m upon the completion of sale of this asset (expected on 31 Oct 2013), which would boost its earnings for FY13. However, this does not affect our valuations on the group as we view the gain as a non-recurring item. We maintain our BUY rating and S$3.42 fair value estimate on RMG.